Despite slashing forecasts for Xbox sales, Microsoft said Tuesday the video-game console had achieved a sufficient market position to do well against competitors in the future, with the company making a major push in online gaming. In a meeting with analysts in New York, Robbie Bach, senior VP of Microsoft's game division, said nearly every Xbox game will eventually let players compete online. "Just like in the last video cycle, you had to move from 2-D graphics to 3-D graphics, we think people will move from no online support to online support being a requirement for everything but a very few games," Bach said.

Microsoft plans to be on the forefront in building games with online support and selling services for those games, as well as helping third-party game developers add similar capabilities. Microsoft and competitor Sony Corp., which makes PlayStation, plan to launch gaming networks by the end of the year. Capabilities initially will include online tournaments among multiple players and real-time chat, eventually expanding to offering music and movies to the consoles.

Microsoft will offer online gaming as a subscription service, with everything the customer needs to sign up contained in the game itself, Bach says. All the customer will need is a broadband connection. "Everything you need will come with the game," Bach says. "From a business-model perspective, we think of this as a subscription service." Because games won't be downloaded, retailers will continue to play an important part in distributing games.

Last week, Microsoft cut forecasts for sales this fiscal year ending June 30 to 3.5 million to 4 million consoles, from 4.5 million to 6 million. Nevertheless, it projects the number of consoles sold will increase to between 9 million and 11 million worldwide by the end of fiscal 2003. Microsoft has about 900 software writers dedicated to Xbox and PC games and says it will spend $500 million from the time of the console's launch late last year through this year's holiday season promoting its games. While Microsoft, a newcomer to video games, expects steady progress against Sony and Nintendo Co.'s GameCube next year, the company believes it will take five years to become a dominant player. "This will be a five-year build," Bach says. "This is not the type of thing that will happen overnight."

One area in which Microsoft has stumbled this year is overseas. The company was forced to cut prices in Europe by 38%, to $267, to stimulate demand. Sales have been particularly disappointing in Japan, where Sony dominates. Bach attributed slow sales in Japan to the time it takes to build relationships with developers, a process that's quicker in the United States and Europe. "It takes time to get to know the people and build the relationships," Bach says. To try to boost sales, the company plans to build games specific to the market.

Earlier, Microsoft said Seamus Blackley, one of the chief architects of Xbox, is leaving the company by the end of the week to start a game-development company, which he plans to unveil next month at the annual video-game convention in Los Angeles. "It doesn't have any impact on the way we're doing business or on our relationships" with developers, Bach said of the resignation.

Although Microsoft loses money on every Xbox it sells, the console has opened up the $20 billion global video-game industry to the company. Microsoft hopes Xbox will eventually offset slower growth in Windows and Office by giving the company an entry into people's living rooms to offer services for music, photos, video and television. However, Xbox is not expected to help the company's bottom line until fiscal 2004.